GENIUS EXPRESS LTD AND ANOTHER v. MANI LTD

HCMP 2714/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2714 of 2014

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JUDGMENT

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1.  The 1^st plaintiff (“P1”) is and was at all material times the registered owner of the property known as all those units A, B, C & D on 21^st floor (“Units A – D on 21/F”), Young Ya Industrial Building (“the building”), Nos 381 – 389 Sha Tsui Road, Tsuen Wan, New Territories.

2.  The 2^nd plaintiff (“P2”) is and was at all material times the registered owner of the property known as all that unit D on 22^nd floor (“Unit D on 22/F”) of the building.

3.  By a tenancy agreement in writing dated 26 April 2011 (“the Tenancy Agreement I”) made between P1 as landlord, through its agent, Taipan Management Company (“the agent”) and the defendant (“D”) as tenant, Units A – D on 21/F were let to D for warehouse/industrial purpose for a fixed term of 2 years from 1 June 2011 to 31 May 2013 at the monthly rent of $108,888 inclusive of rates, Government rent and management fees and on the terms as set out therein.

4.  By another tenancy agreement in writing also dated 26 April 2011 (“the Tenancy Agreement II”) made between P2 as landlord, through the agent, and D as tenant, Unit D on 22/F was let to D for warehouse/industrial purpose for a fixed term of 2 years from 11 May 2011 to 31 May 2013 at the monthly rent of $26,208 inclusive of rates, Government rent and management fees and on the terms contained therein.

5.  Both the Tenancy Agreement I and the Tenancy Agreement II   contained the following option to renew clause (“the option clause”):

“ THE TENANT SHALL HAVE OPTION TO EXTEND TWO YEARS (FROM 01 JUN.,2013 TO 31 MAY,2015) AT MARKET RENT, SUBJECT TO WRITTEN NOTICE BEFORE 01 APR., 2013”

6.  Prior to the expiration of the term under the Tenancy Agreement I and the Tenancy Agreement II, D gave notice to the agent exercising its option to renew the tenancy under the option clause for a further term of 2 years.

7.  The parties were unable to agree on the market rent for the renewal of the tenancies for a further term of 2 years under the Tenancy Agreement I and the Tenancy Agreement II.

8.  There is no dispute that the tenancies were renewed pending agreement or determination of the market rent for the period.  

9.  By the originating summons P1 and P2 seek the determination of the court on the market rent payable by D for the period from 1 June 2013 to 31 May 2015 (“the period”) under the Tenancy Agreement I and the Tenancy Agreement II.  They claim against D for the difference between the market rent determined by the court and the rent being paid by D with interest thereon.

10.  Prior to the commencement of these proceedings by the originating summons issued on 30 October 2014, P1 and P2 had asked D for the monthly rent of $8.00 per sq ft inclusive of rates, Government rent and management fees for the period relying on the valuation provided to them by Centaline Surveyors Ltd.  This was rejected by D.

11.  The parties agreed to appoint a single joint expert to be nominated by the Hong Kong Institute of Surveyors to determine the market rent of Units A – D on 21/F and Unit D on 22/F for the period.

12.  P1 and P2 were not prepared to appoint the single joint expert on the basis that his report would be final and binding on the parties.  They were, however, prepared to accept that the single joint expert do prepare a report which would be subject to the parties’ rights under Order 38, rule 4A of the Rules of the High Court.  D agreed to this course.

13.  Pursuant thereto, Mr Paul Varty (“Mr Varty) was nominated by the President of the Hong Kong Institute of Surveyors and he was appointed as the single joint expert to determine the market rent of Units A – D on 21/F and Unit D on 22/F for the period.

14.  Mr Varty, as the single joint expert appointed by the parties, expressed his views in his detailed valuation report dated 30 April 2014 (“Mr Varty’s report”).

15.  For the reasons he gave, Mr Varty assessed the monthly market rent for the period for Units A – D on 21/F at $7.54 per sq ft.  On the saleable area of 20,950 sq ft he assessed the monthly rental value at $157,963 (7.54 × 20,950) which he rounded off at $158,000.

16.  For the reasons he gave, Mr Varty assessed the monthly market rent for the period for Unit D on 22/F at $7.84 per sq ft.  On the saleable area of 5,170 sq ft he assessed the monthly rental value at $40,532(7.84 × 5,170) which he rounded off at $40,500.

17.  There is no dispute that D has paid P1 and P2 respectively, the market rent assessed by Mr Varty for the period. 

18.  P1 and P2 were not prepared to accept Mr Varty’s valuation contained in Mr Varty’s report. 

19.  P1 and P2 issued the originating summons on 30 October 2014.

20.  P1 and P2 had intended to adduce expert evidence on the market rent for the period by way of an expert report dated 26 July 2013 from Ms Pamela Lam of Centaline Surveyors Ltd pursuant to the order of Deputy High Court Judge Saunders on 13 July 2015.

21.  However, Ms Pamela Lam of Centaline Surveyors Ltd subsequently informed P1 and P2 that she was not prepared to give evidence in court.  P1 and P2, therefore, engaged Mr Andy Law (“Mr Law”) of A G Wilkinson & Associates (Surveyors) Ltd as their expert.

22.  Mr Law’s opinion on the market rent for the period is contained in his 2 reports both dated 10 August 2015.  His 1^st report (“Mr Law’s 1^st report”) is in relation to Units A – D on 21/F.  His 2^nd report (“Mr Law’s 2^nd report”) is in relation to Unit D on 22/F.

23.  For the reasons he gave in Mr Law’s 1^st report, Mr Law assessed the monthly market rent for the period for Units A – D on 21/F at $9.6352 per sq ft.  Taking a saleable area of 20,748 sq ft he assessed the monthly market rent at $199,911 (9.6352 × 20,748) which he rounded off to $200,000.

24.  For the reasons he gave in Mr Law’s 2^nd report, Mr Law assessed the monthly market rent for the period for Unit D on 22/F at $9.7032 per sq ft.  Taking a saleable area of 4,905 sq ft he assessed the monthly market rent at $47,594 which he rounded off to $48,000.

25.  By a consent order made by Deputy High Court Judge Saunders on 12 July 2016, directions were given for Mr Varty and Mr Law to meet on a without prejudice basis and with a view to agreeing or narrowing down the expert issues to be decided by the court.  The judge also gave directions for the experts to prepare a signed joint report identifying the issues on which they have reached a common opinion and the issues on which they have failed to reach a common opinion and their competing views on each such issue. The experts were also required to state the reasons for their disagreement with the opposing views.

26.  Pursuant thereto, Mr Varty and Mr Law met and prepared a joint statement on valuation dated 29 September 2016 (“the joint report”).  The joint report sets out the matters on which Mr Varty and Mr Law agreed and the matters on which they disagreed giving reasons for their respective views.

27.  By the consent order of Au-Yeung J dated 12 December 2016, Mr Varty and Mr Law were ordered to attend the substantive hearing of the originating summons for cross examination and it was ordered that no other witnesses shall be called.  It was further ordered by consent that, inter alia, no further evidence shall be filed without leave of the court.

28.  At the hearing of the originating summons Mr Varty was cross-examined by Mr Jerome Liu, for P1 and P2, and Mr Law was cross-examined by Ms Connie Lee, for D.

29.  I have considered the submissions of counsel as well as Mr Varty’s report, Mr Law’s 1^st report, Mr Law’s 2^nd report and the joint report.  I have also considered the evidence of Mr Varty and Mr Law at the hearing before me.

30.  As set out in the joint report, it was agreed by both experts that the date of the valuation was 1 June 2013 and that the valuation was for the period.  It was also agreed that the market rent was on an inclusive basis ie inclusive of rates, Government rent and management fees.

31.  The experts also agreed that the basis of valuation was according to the HKIS Valuation Standards using the comparative method of valuation.

32.  The experts agreed that the saleable area for Units A – D on 21/F should be 20,950 sq ft and that the saleable area for Unit D on 22/F should be 4,989 sq ft.

33.  The difference in the market rent for the period assessed by Mr Law and Mr Varty in the joint report can be found at para 9 thereof.  The difference is as follows:

(1)    for Units A – D on 21/F, Mr Law’s opinion is $200,000 per month based on the unit rate of $9.547 per sq ft; Mr Varty’s opinion is $158,000 per month based on the unit rate of $7.542; and

(2)    for Unit D on 22/F, Mr Law’s opinion is $48,000 per month based on the unit rate of $9.621 per sq ft.  Mr Varty’s opinion is $39,000 per month based on the unit rate of $7.837.  This is slightly less than the sum of $40,500 as set out in Mr Varty’s report. This was amended by Mr Varty in the joint report to the slightly lesser sum of $39,000.  Nothing turns on this as D has already paid the rent for the period to P2 based on the monthly rent of $40,500.

34.  The major difference between the valuations of Mr Varty and Mr Law is in relation to the comparables that they have used.  Mr Varty has used comparables from the building.  All his comparables are from the same building.  Mr Law, however, has only used 2 comparables from the building.  The rest of his comparables are from different buildings in the Tsuen Wan area.

The applicable legal principles

35.  Ms Lee, for D, submitted, correctly in my view, that the basic principle underlying the comparative method of valuation is to compare like with like, in terms of time, size and location and such factors as are relevant to the particular subject matter for the valuation.

36.  Deputy High Court Judge To (as he then was) in Menno Leendert VOS v Global Fair Industrial Limited and others (HCA 4200/1995, 1 December 2009) said at para 215 of his judgment:

“ Valuation of the Units

215. Before considering the parties’ evidence and submissions on valuation, I shall make a few observations on the methodology in valuation.  The methodology adopted by Vigers in the valuation reports presented to Court is what is commonly called the direct comparison method.  That method is usually adopted by valuers and is preferred especially if suitable comparables are available.  The idea and principle behind this method is simple and logical.  The basic principle is to compare like with like, in terms of time, size, location and such factors as are relevant to the particular subject matter for the valuation.  The method involves calculating the unit rate in sale and purchase transactions of similar properties made at about the same time as the value date of the subject property.  The valuer then makes adjustment for size, time lag, location and any other factors which the valuer considers appropriate and calculates the adjusted unit rates.  Then, the valuer applies a weighting factor to the adjusted unit rates and calculates the unit rate for the subject property from which he assesses the valuation.  If comparable transactions in the same building are available, they are preferred.  Fewer adjustments will have to be made and the weighting factor may also be dispensed with altogether.  In such a case, the valuer only needs to make adjustments for size and time lag.” [Emphasis added]

37.  In Sentry Holdings (Asia) Ltd v Cali Enterprises Ltd [1983–85] CPR 140 it was held by the Lands Tribunal that where recent comparable lettings in the same property were available in sufficient numbers to enable a reasonable assessment to be made of the prevailing market rent, there was no need to rely on comparisons with premises in other buildings, save to the extent necessary to show that rents in the same property did not diverge sharply from the general market level.

38.  In Doultsons Limited v Lee Pui Nang (LDNT 107/2002, 10 September 2002) Deputy Judge Wong in the Lands Tribunal said at para 15 of his judgment:

“ I agree with the ruling in Sentry Holdings (Asia) Ltd v Cali Enterprises Ltd., supra. When there are sufficient comparables in the same development as the Premises, it is not necessary to refer to comparables in other developments……”

39.  Mr Liu, for P1 and P2, relied on Urban Parking Limited v The Commissioner of Rating & Valuation (LDRA 377 & 378 of 2002, 10 September 2003).  At para 17 of the judgment of Mr W K Lo in the Lands Tribunal he said that:

“ ……if suitable comparables are available in locations close to the subject tenement, they are invariably preferred to the other comparables, even though the latter were also located in the same district of Shatin”

40.  And at para 18, Mr W K Lo said:

“ There is of course no rule in principle against using comparables that are located some distance away from the subject tenement. (Hsin Kuang Restaurant (Holdings) Ltd. Case refers) But, as rightly pointed out by Counsel for the Respondent, if there are good comparables situated close to the tenement, why should comparables further away be adopted as the best comparables?”

41.  Mr Liu submitted that it was appropriate for Mr Law to adopt the comparables from the other buildings in the Tsuen Wan area.

42.  In my view, Urban Parking provides no assistance to P1 and P2. In that case the subject tenement was a fee-paying public car park. The tenement was a piece of open land.  There were no other comparables available in the same tenement.  It was necessary to look for comparables elsewhere in the same district of Shatin. It seems to me that was why it was said in that case that if suitable comparables are available in locations close to the subject tenement, they were preferred to comparables located further away.

43.  Mr Varty has set out the comparables that he has used and his analysis in a schedule to the joint report which is at pages 854 and 855 of Bundle 3 (“pg. 854 and pg. 855”). 

44.  Mr Law has set out the comparables that he has used and his analysis in two schedules in the joint report.  In respect of the valuation of the market rent for Units A – D on 21/F, Mr Law’s schedule setting out the comparables that he has used and his analysis is at page 814 of Bundle 3 (“pg. 814”).  In respect of the valuation of the market rent for Unit D on 22/F, Mr Law’s schedule of the comparables that he has used and his analysis is at page 846 of Bundle 3 (“pg. 846”).

45.  As I have said, only 2 of Mr Law’s comparables are from the building. These are comparables 1 and 2 at pg. 814 in respect of his valuation of the market rent for Units A – D on 21/F and comparables A and B at pg. 846 in respect of his valuation of the market rent for Unit D on 22/F.  Comparables 1 and 2 are the same comparables as comparables A and B. The remaining 5 comparables used by Mr Law are all from different buildings in the Tsuen Wan area.  The locations of the other comparables used by Mr Law for his valuations of the market rent for Units A – D on 21/F are shown in the location plan at page 813 of Bundle 3 (“pg. 813”). The locations of the other comparables Mr Law used for his valuation of the market rent for Unit D on 22/F are shown in the location plan at page 825 of Bundle 3 (“pg. 825”).

46.  Apart from the 2 comparables that Mr Law used from the building, all the other comparables that he used in his valuations are some distance away from the building, although within the Tsuen Wan area.  In particular, comparable 7, as shown in the location plan at pg. 813, and comparable D, as shown in the location plan at pg. 825 seem to be quite far away from the building.

47.  Mr Varty was adamant that there was no necessity for him to use comparables from other buildings as there were sufficient good comparables in the building. 

48.  Mr Law agreed in evidence that generally, comparables from the same building are more reliable and preferable because when adopting them, less adjustments would have to be made. He did not, however, agree that using comparables within the same building were necessarily more reliable and preferable.  He accepted that in respect of the 2 comparables that he used from the building, he attached a greater weight to them.  He confirmed what he said at para 8.1.1 of the joint report where Mr Law said that he placed greater weight to the 2 comparables from the building and that he placed less weight for the other comparables from different buildings.

49.  Mr Law’s analysis at pg. 846 (in relation to Unit D on 21/F) shows that Mr Law listed a total of 18 adjustments.  In evidence Mr Law agreed that for the 2 comparables from the building he only made 2 adjustments whereas for the comparables from the other buildings he had to make many more adjustments.  This is also reflected in the “Total adjustment %” which shows that of the comparables in the other buildings, a much greater percentage of adjustments had been made by Mr Law when compared with the 2 comparables in the building.  Similarly, Mr Law’s analysis at pg. 814 (in relation to Units A – D on 21/F) also shows that of the comparables in the other buildings, a much greater percentage of adjustments had been made by Mr Law when compared to the 2 comparables in the building.

50.  As can be seen from Mr Law’s analysis at pg. 814, his comparable 1 is Unit D on 15/F of the building which is also his comparable A at pg. 846.  This is the same as the comparable 6 used by Mr Varty as can be seen at pg. 855. 

51.  Mr Law’s comparable 2 at pg. 814 is the same as his comparable B at pg. 846.  

52.  When cross-examined, Mr Law accepted that in respect of the 2 comparables in the building that he used, his adjusted unit rent was similar to Mr Varty’s adjusted unit rent for the same 2 comparables.  He accepted that to a large extent the difference in the overall assessment of the valuation between him and Mr Varty was because he had used 5 comparables from different buildings.

53.  Mr Varty said in evidence that as there were more than sufficient comparables in the building there was no reason for him to go and look at comparables from other buildings in the Tsuen Wan area.  He also said that when one had to consider comparables from other buildings many additional adjustments will have to be made which would be unnecessary if comparables from the same building were taken.  I accept his evidence.

54.  Mr Varty also said, and I accept, that the likelihood of inaccuracy is far greater with more adjustments being made (para 6.3.2 of the joint report).

55.  Mr Law also mentioned in evidence that when he prepared Mr Law’s 1^st report and Mr Law’s 2^nd report he had not been supplied with Mr Varty’s report which detailed all the comparables that were available from the building.  It is indeed surprising that P1 and P2 did not bother to supply Mr Law with Mr Varty’s report containing all the available comparables in the building when instructing him to prepare his reports. 

56.  Subsequently, Mr Law did have all the information contained in Mr Varty’s report.  As I have said, they met on a without prejudice basis before writing the joint report.  I would observe that, save for comparable 8, all the tenancy information on the comparables in the building are contained in the documents provided by Mr Varty in Mr Varty’s report and in the joint report.  There has never been any dispute about the authenticity of those documents.  In my view, Mr Varty properly adopted those comparables in his valuation and made the adjustments that he considered were appropriate.

57.  Mr Law considered that comparables 3, 4 or 5, and 8 that were adopted by Mr Varty were not appropriate.

58.  As for comparable 8 (Unit A on 20/F) that was used by Mr Varty, Mr Law said that it was not appropriate to adopt this comparable as there was no documentary evidence of the tenancy for this unit.  In his further comments at para 12.3.3 of the joint report, Mr Varty said that he included this comparable as very similar information was provided to him by two independent sources.  He included this but gave it a low weighting as the information was not verified by documents.  I would observe that Mr Varty gave this comparable a relatively low weighting factor of 2 as shown at pg. 855.  I am satisfied that it was appropriate for Mr Varty to take this comparable into account and give it what he considered to be a lower weighting factor.  

59.  I would observe that when cross-examined, Mr Law confirmed that by taking out comparable 8, which has a relatively higher rental, that would have worked to the disadvantage of the landlord. P1 and P2 as the landlord were, by these proceedings, seeking to obtain a higher rental than what has been paid by D.

60.  As for comparable 3 adopted by Mr Varty, this was Unit A on 3/F of the building.  Mr Law considered this comparable as being inappropriate to adopt for the reasons given at paras 6.4.8 and 6.4.9 of the joint report.  He made the point that the unit was attached with an extensive flat roof of 2,072.9 sq ft which he said Mr Varty did not take into account.  He also said that no adjustment was made by Mr Varty for the higher loading capacity on this floor.

61.  If the flat roof is taken into account this would have the effect of a lower rental value for comparable 3.  In his further comments at para 12.3.2 in the joint report where, for the reasons he gave, Mr Varty disagreed with Mr Law.  I prefer the opinion of Mr Varty to Mr Law’s opinion.  I am satisfied that comparable 3 was a reliable and appropriate comparable for Mr Varty to use.

62.  In any event, in my view, there is nothing in the point raised by Mr Law.  Mr Law accepted in evidence that the exclusion of comparable 3 by Mr Varty would have worked to the disadvantage of P1 and P2 who are claiming a higher rental than what has been paid by D.  By excluding comparable 3, Mr Varty would have arrived at a lower rental than what he assessed.

63.  As regards comparable 4 (Unit A on 11/F) and comparable 5 (Unit C on 11/F) which were used by Mr Varty, Mr Law considered that there was an element of double counting in respect of comparables 4 and 5 as set out at para 8.4.2 of the joint report. He was of the view that both of the units were subject to the same landlord and tenant with the same commencement date and term of tenancy.  Mr Law suggested that comparables 4 and 5 should be combined to 1 single comparable rather than 2 comparables.  

64.  Mr Varty disagreed with Mr Law and at para 12.3.5.1 of the joint report he considered that it was appropriate to treat comparables 4 and 5 as two separate comparables.  As Mr Varty said, there were two different agreements with different landlords, although virtually the same shareholders, and with the same tenant.  He considered that they could, therefore, be separately terminated, renewed and generally dealt with separately.  I accept his evidence and find that it was appropriate for Mr Varty to treat these comparables as two separate comparables.  I prefer the opinion of Mr Varty to the opinion of Mr Law.

65.  Mr Law at para 7.1.6 of the joint report was of the view that as the demand for higher floors was greater than for lower floors, the unit rate for rentals in the higher floors tended to be on the high side.  He said that he made adjustments for this.

66.  Mr Varty disagreed with Mr Law at para 7.3.6 of the joint report.  He did not make any adjustment for floor level in this case.  Mr Varty was cross-examined about whether he considered that units at a higher level would command a higher rental.  In evidence Mr Varty explained that for residential properties, generally higher floors would have higher rental values and that it was similar for office properties.  He said that in his experience, for industrial properties, like the building, that was not the same situation as for residential or office properties.  In this case, Units A – D on 21/F and Unit D on 22/F were let and were used for warehouse/industrial purposes.  This is undisputed. Mr Varty was of the view that with storage, warehouse and godown uses what is important is the movement of goods.  He said that many such users may prefer to be on a lower floor to mitigate problems with waiting time for lifts and that they would not be interested in the view that higher floors may offer.  I accept his evidence and his reasons for not making adjustments for floor level. I prefer the opinion of Mr Varty to Mr Law’s opinion.

67.  In my judgment, the comparables used by Mr Varty were reliable and suitable comparables in arriving at his valuation.  It was inappropriate in the circumstances to have regard to comparables in other buildings, as Mr Law did.  I find that Mr Varty’s opinion is more reliable and preferable to the opinion of Mr Law.

68.  I find that as set out in the joint report for Units A – D on 21/F the market rent for the period is $200,000 per month and for Unit D on 22/F the market rent for the period is $39,000.  As I have said, D has already paid the market rent to P1 and P2 for the period and in fact for Unit D on 22/F, D has paid P2 slightly more.  These proceedings were unnecessary.

69.  P1 and P2’s claims under para (2) of the originating summons are dismissed.

70.  I also make an order nisi that P1 and P2 do pay D the costs of the originating summons, such costs to be taxed, if not agreed.